Bank of England policy could lead to declining economy

David Blanchflower has issued a warning over the Northern Ireland economy

By David Elliott
– 22 January 2013

If the Bank of England continues to focus on keeping control of the UK inflation rate then the Northern Ireland economy could deteriorate further, a past member of the committee which sets interest rates has said.

David Blanchflower said that by following its current remit of keeping inflation at 2%, the central bank could be forced to increase interest rates before the economy has recovered fully.

Because the Northern Ireland economy lags well behind the UK as a whole, and particularly London and the south east of England where the bulk of economic output originates, the region could be one of the hardest hit by such a move.

"Think of the people in Northern Ireland on tracker mortgages," he said. "(If interest rates rise) that's not going to be good for them and the worry is that you'll also see more and more companies failing as well."

Mr Blanchflower was speaking to the Belfast Telegraph before he addressed a gathering of business leaders organised by the private client investment firm Davy Northern Ireland.

The economist, who is a vocal critic of the government's current monetary policy, particularly its austerity spending cuts, said such a move would also dent sectors across the UK

"We've already seen Comet and HMV go and that would be followed by big manufacturing. This is very serious and it would seem the government has little or no industrial policy."

Mr Blanchflower's comments come as Bank of England governor Sir Mervyn King arrives in Belfast to speak at a CBI dinner in Belfast.

And Mr Blanchflower had plenty of advice for incoming governor Mark Carney.

He said the former Canadian Central Bank governor should follow the US Federal Reserve's lead by using forward guidance - committing to keeping interest rates low for a prolonged period - and targeting an unemployment rate of 6.5% rather than worrying about rising inflation.

Mr Blanchflower was an external member of the monetary policy committee at the Bank of England from June 2006 to May 2009, one of the most tumultuous periods in the history of the UK economy.

Asked whether the huge hikes in the price of property in Northern Ireland around that period - the average price of a house here jumped 55% in the 12 months to June 2007 - were noted by the MPC at the time, he was more evasive.

"They were noted, absolutely, but the big rises were before I joined," he said. "They (the property market rallies) were discussed but the mistake was to think the house prices were more sustainable than they turned out to be.

"During the boom years the bank held rates too low for too long and then held rates too high for too long when the economy began to deteriorate."

When it comes to Northern Ireland's efforts to get the power to set corporation tax here devolved so it can be reduced from the current level of 24% to the same as that in the Republic of 12.5%, Mr Blanchflower said he was a backer.

"I'm completely supportive of that," he said. "I'm a big tax cutter and have been telling the Labour party that's the way to go. I certainly think a corporation tax cut, especially combined with the likes of job credits for hiring people and for infrastructure spend, would be great boost."

Factfile

David Blanchflower is the professor of economics at Dartmouth College, New Hampshire, part-time professor at the University of Stirling, and a research associate at the National Bureau of Economic Research and a visiting scholar at the Federal Reserve Bank of Boston. He was an external member of the Monetary Policy Committee at the Bank of England from June 2006 to May 2009, one of the most tumltuous periods in the UK economy's history. As the economic downturn began to take hold in 2008 he was one of the first members of the committee to vote for lower interest rates and was only followed by a mjority when the economic slump deepened.

COMMENT RULES: Comments that are judged to be defamatory, abusive or in bad taste are not acceptable and contributors who consistently fall below certain criteria will be permanently blacklisted. The moderator will not enter into debate with individual contributors and the moderator’s decision is final. It is Belfast Telegraph policy to close comments on court cases, tribunals and active legal investigations. We may also close comments on articles which are being targeted for abuse. Problems with commenting? customercare@belfasttelegraph.co.uk